Measuring the economic impact of the ash cloud

It seems to me to be virtually impossible to put a meaningful number on the economic impact of the volcanic ash cloud, but that hasn't stopped John Hawksworth, PWC's head of macroeconomics, from trying. His estimate at 0.025 to 0.05 per cent of annual GDP for a week's disruption is surprisingly small – not much more than a rounding error.

His number is arrived at in the following manner. The gross output of the UK air transport industry is approximately £50m a day. To this must be added tens of millions of pounds a day to take account of disrupted supply chains and passengers stranded overseas and therefore unable to go to work.

On the other side of the ledger, there is a significant boost to other modes of transport from road to rail and ferries, and there may be increased demand for hotels and other services from travellers stranded in the UK. But this latter effect may be more than cancelled out by the fact that very few tourists are getting in right now. As a result, some hotels report a significant rise in room vacancies. Staff are being stood down to match.

Even so, Mr Hawksworth puts the grand cost at no more than £50m to £100m a day, which adds up to £350m-£700m for a week.

But of course none of this takes account of the longer term impact of the disruption. If Iceland is entering a renewed phase of vulcanic activity, the UK may have to prepare for repeated disruptions. This might deter people from travelling to and from the UK on an indefinite basis, with airline travel shifting as a consequence to "safer" hubs in southern Europe. If bankers cannot easily get in and out, it might also have a negative impact on the City.

Nobody knows at this stage, but the longer term impact could be significantly greater than just 0.025 per cent of GDP.